With Alibaba back in focus, what are the other opportunities in China?
18 Apr 2023
This post was created in partnership with UOB Asset Management Limited. All views and opinions expressed in this article are Beansprout's independent and professional opinions.
When it comes to investing in Chinese stocks, the first name that often comes to mind is probably Alibaba.
After all, the Chinese e-commerce giant founded by Jack Ma has a market value of above US$ 250 billion and is often seen as the face of China’s technology boom.
Alibaba has been back in focus recently, after the company announced that it will split into six business groups, each with the ability to raise external funding or be separately listed.
The renewed spotlight on Alibaba naturally led many investors to wonder – what could be the next big success story in China, and how do we find the next Alibaba to invest in?
Why China’s ‘little giants’ could be the next big thing
In case you have not heard, China is counting on its “little giants” to drive its economic growth. From chip producers to robotic manufacturers, these are promising new companies developing strategically important technologies.
Evidently, the US-China trade war, Ukraine crisis, and US ban on chip exports to China have highlighted the need for China to be self-sufficient and close its technology gap in key industries.
The Chinese government has an ambitious target to develop 10,000 of such ‘little giants’ by 2025, according to an announcement by the State Council in August 20211. The authorities will support their growth by providing generous subsidies and grants, tax cuts, as well as access to talent.
China’s ‘little giants’ are also at the centre of the country’s economic shift towards consumption and adoption of clean energy. For example, there has been more intense efforts to boost consumption of green and smart home appliances. ‘Little giants’ are well positioned to innovate in this field as they are nimble in responding to changing consumption patterns.
How do we gain exposure to China’s ‘little giants’?
Many investors wanting to get exposure to Chinese stocks will likely start with the ‘H’ share market and American Depository Receipts (ADRs) listed in the US.
‘H’ shares refer to shares of Chinese companies listed on the Hong Kong Stock Exchange. This would include familiar names such as Alibaba (9988.HK) and Tencent (0700.HK).
Some of these companies may also trade in the United States as American Depository Receipts (ADRs). These ADRs have been in the limelight over the past few years due to investor concerns of potential delisting risks.
If you’re trying to look for China’s ‘little giants’ amongst the ‘H’ shares or ADRs, good luck trying!
These markets may be known as the place to invest in China’s tech giants, but it’s not where the ‘little giants’ are commonly found.
Here’s a tip for you - China’s little giants can be found in its domestic stock market, also known as the Chinese ‘A’ share market.
Chinese A-shares are the shares of Chinese companies listed on two domestic stock exchanges – the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE).
According to estimates, listed ‘little giants’ represent more than 20% of listings in the ‘A’ share market last year. This brought their total listed market value to close to RMB 5 trillion, a 36% increase compared to the previous year.
Hence, we would need to look at the A-Shares market to find these ‘little giants’ which are potentially driving the next leg of China’s economic growth.
For those of us in Singapore, getting access to the A-Shares market was a challenge in the past. Thankfully, we now have a few ways to gain easy access to the A-Share market.
How the UOBAM Ping An ChiNext ETF offers exposure to China’s ‘little giants’
The UOBAM Ping An ChiNext ETF was listed on the Singapore Exchange (SGX) in November last year, and offers exposure to the largest and most traded stocks on the ChiNext market.
For those who are not familiar with the ChiNext market, it is seen by many as China’s equivalent of the NASDAQ, housing China’s fast growing companies. Not surprisingly, it is also where the most number of ‘little giants’ are listed on.
What you’ll find here would be many of the “strategic emerging” industries such as clean energy and healthcare – sectors where we’d expect the ‘little giants’ to be found.
The top holding of the UOBAM Ping An ChiNext ETF is Contemporary Amperex Technology Co Ltd (CATL), the largest electric vehicle (EV) battery manufacturer in the world with Tesla as one of its customers!
Its top 10 holdings also include healthcare stocks such as Shenzhen Mindray, which is one of the largest medical suppliers in China. Mindray saw demand for its ventilators surge during the Covid-19 pandemic.
Here’s an interesting fact – over 80% of ChiNext’s more than 1,000 companies made a profit as of August 2021 despite Covid challenges, according to a Shenzhen Stock Exchange announcement in September 2021.2
You can also diversify your portfolio by getting exposure to the ChiNext market as it has a low correlation with global indices.
How the United China A-Shares Innovation Fund offers exposure to China’s ‘little giants’
For those who would like a more actively managed fund to gain access to China’s little giants, we can also consider a unit trust such as the United China A-Shares Innovation Fund.
Compared to an ETF like UOBAM Ping An ChiNext ETF, a unit trust is actively managed by a professional fund manager who will use his/her expertise with the objective of achieving long term capital appreciation.
After all, some of these ‘little giants’ might be undiscovered gems that require some work in uncovering.
The fund manager doing the work here is UOB Asset Management, which has over 35 years of investment experience and S$36.5 billion of assets under management as of 31 March 2022. They are supported by the fund’s sub-manager Ping An Fund Management, UOB Asset Management’s joint venture partner based in China. Established in 2011, Ping An Fund Management is approved by the China Securities Regulatory Commission and has assets under management of over RMB 800 billion as of 30 November 2022.
As its name suggests, the fund invests mainly in A-shares of companies listed in China. Many of these companies are seen to be strategically exposed to growth trends in the technology and consumer sectors.
The fund invests in three key themes 1) New energy and IT innovation, 2) High-end manufacturing upgrades, and 3) consumption upgrades.
Taking a look at its key holdings as of 28 February 2023, we noticed some interesting companies such as Longshine Technology Group, which provides software and digital services to more than government and enterprise customers. and Yunnan Energy New Material, which provides plastic films for electric vehicle lithium batteries.
What would Beansprout do?
We can consider different ways to gain exposure to Chinese stocks, as China’s economic re-opening is expected to be one of the key drivers for stock markets this year.
Notably, the A-share market is home to many of China’s ‘little giants’, which are expected to propel China’s next stage of growth.
The good news is that the price-to-earnings ratio of the A-share market is still below its historical average as of February 2023. This means that we can potentially increase the likelihood of benefitting from their growth without overpaying.
If you’re looking for a fuss free way to ride on the growth of these companies, you can now do so with a single trade on the SGX through the UOBAM Ping An ChiNext ETF.
If you prefer to have a professional fund manager assist in picking the winners amongst these ‘little giants’, then you can consider the United China A-Shares Innovation Fund, which can be purchased through UOBAM’s network of distribution partners.
With these funds, you might be be able to own a slice of China’s next Alibaba in your investment portfolio.
Click here to learn more about the UOBAM Ping An ChiNext ETF.
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1Source: The State Council of People’s Republic of China, 26 Aug 2021
2Source: Shenzhen Stock Exchange, 1 Sep 2021